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Copyright: Toni Straka, 2005-2011 This blog is for information and entertainment purposes only. Under no circumstances does this information represent a recommendation to buy or sell securities or any other type of investment instruments.

Wednesday, September 22, 2010

Here is one more proof that deflation (of asset prices) and inflation (in all the stuff you buy in everyday life) can exist at the same time and that official inflation figures are probably more of a kind of crapshoot than any economist wants to admit.
Hat tip goes to @fiatcurrency who published this chart via Twitter.

GRAPH: In the last 25 years the German consumer price index rose by 58.1% but a visit to the world famous Oktoberfest costs you now 152.2% more than in 1985. The calculation is based on following expenses: local public transport, 1/2 grilled chicken and 2 litres of beer (IMHO a very frugal Oktoberfest visit;-)

As I put a lot more trust into the business sense of Oktoberfest caterers than into funny official inflation data that gets contradicted every time I stop at the gas pump, eat in a restaurant or need state services I presume this Oktoberfest data reflects the true cost of living i.e. the true davaluation speed of fiat currencies much better than the data we are being fed by authorities.

Citibank Favors Euros - Escape Into Gold!
Exactly for this reason I am not buying in Citibank's Wednesday FX alert by John Englander that states 9 reasons to go long Euros (my opinion in bold italics).

The net effect of global central bank dovishness, policy easing and FX interventions is to encourage liquidity and a global risk-on environment that supports the debt of high-spread European countries. This risk-on will turn into panic selling when optimist forecasts will be reversed one more time as happened so frequently in the past 3 years.

The combination of euro zone fiscal austerity and ECB reluctant backstopping of sovereign debt is more attractive than the US policy mix of easy fiscal and possibly aggressive quantitative easing. Quantitative easing will add to the global overhand of USD assets. Who would want to support a heavily indebted continent with a growing problem of unfunded pensions liabilities in the long Term?

In our view the market is at best neutral EUR and very probably still short. The smart money is short all fiat currencies and long gold.

USD buying has overwhelmingly been driven by safe haven concerns with Treasuries the dominant purchase – unwinding of these purchases means broad USD weakness, including versus the euro. German 10-year bunds yielding 2.40% are not really a savings alternative either, the chart above shows.

Indications of stronger growth outside the US (and G3) will support euro zone growth. We will see...

The effect of improved global and European confidence on growth is an offset to the negative effect of exchange rate appreciation in the short term. That must come straight from CNBC. It's been long ago that I last talked to optimists with a track record of being right.

Similarly the published indications of central bank reserves activity suggest that they are still actively trying to diversify out of USD; the euro may not be the most attractive asset globally but it is the deepest and most liquid alternative. Well, I prefer to buy value vs. liquidity.

The euro weakness trade has been overwhelmingly a sovereign risk trade and today’s auction suggests that concerns are abating. Sure, Portugal pays 90 bips more than a month ago for the 10-year and barely manages to issue €750 million (lower range vs. €1 billion high estimate) and the world is OK again. Never mind that Eurozone spreads are all close or at their lifetime highs.

Citi’s Chief Economist Willem Buiter has written: ”Although financial markets may, in our view, overestimate the probability of default for the peripheral European countries bar Greece, they would certainly do well to recognise that sovereigns can default anywhere.” If the euro zone succeeds in delaying a Greek restructuring (should one be needed ultimately) over the term of the EU/IMF program, the odds are that investors will see Greece as an isolated issue, rather than extending broadly to other countries with severe fiscal difficulties. Err, anybody remembers a recent Wirtschaftswunder in the Club Med? I don't.

As one cannot be sure that banks' analysis is written with the pure ulterior motive of serving customers these days when said banks scramble for capital worldwide I am willing to follow the safest of all routes: Escape from all paper money into gold which pierced the $1,295 mark to hit a new record high at the time of writing.
DISCLOSURE: Long gold.

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EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

FROM THE US TREASURY WEBSITE: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy."

A LESSON FROM HISTORY BOOKS: The past 300 years have proven that ALL fiat money experiments ended in complete devaluation. From Rome to Britain: every empire vanished into oblivion soon after it went off the gold standard. It is time to recognize the obvious: Unbacked money has never worked.

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About Me

I am an INDEPENDENT Certified Financial Analyst who worked as a financial journalist for 15+ years and now evaluate global market trends. Analyzing financial and political news permanently I want to share my insight with those who understand that we are in an era of global redistribution of wealth. The US-European centric approach does not work anymore. 6 billion people in the developing countries now demand their fair share of the world's resources.
Having worked many years for a leading newswire I have learned to understand the fatal concept of ever expanding credit by heart. If you want to learn about the future of the economy, study history.